As a sole proprietor, you may be able to wipe out both your personal and business debts by filing Chapter 7 bankruptcy.

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If
you are a sole proprietor, you may be able to wipe out both your
personal and business debts by filing Chapter 7 bankruptcy. Read on to
learn more about what a sole proprietor is and how a Chapter 7
bankruptcy might be able to help if you are struggling with business
debt.

What Is a Sole Proprietor?

A sole proprietorship is an unincorporated business entity owned by a
single individual. The owner is called the sole proprietor. In a sole
proprietorship, the business is not a separate legal entity apart from
its owner. Instead, the law treats the sole proprietor and the business
as the same legal entity.

Liability for Debts

In a sole proprietorship, all business debts are also the personal
obligations of the sole proprietor. This means that if you don’t pay
the debt, the creditor can come after your business assets as well as
your personal assets (such as your car or house) to collect it.

How Can Chapter 7 Bankruptcy Help Sole Proprietors?

Because a sole proprietor’s business debts are treated like personal
debts, they will be wiped out by his or her Chapter 7 discharge. Since
all debts and assets of the business are also those of the sole
proprietor, creditors can no longer collect from the owner or the
business after discharge.

How Does Chapter 7 Treat Sole Proprietorship Assets and Income?

Business Assets

Since the sole proprietorship is not a separate legal entity, all
business assets are treated as your personal assets and must be listed
in the bankruptcy. This includes all tools, equipment, and machinery
used in the business as well as any accounts receivable. The bankruptcy
trustee may also require you to provide a balance sheet or an asset
list.

As a result, you need to make sure that there are enough exemptions
to cover all assets of the sole proprietorship. Otherwise, the
bankruptcy trustee may be able to sell off all nonexempt assets which
can shut down your business. However, most states have specific
exemptions for equipment and tools of trade used in your business that
you can use to help protect these assets.

Business Income

All income earned by the sole proprietorship flows through to the
individual owner. This means that you must disclose all income
generated by your business in the bankruptcy. As a result, you will
need to calculate and list your gross income and subtract your business
expenses on the bankruptcy forms to arrive at the net income. The
bankruptcy trustee will usually require supporting documentation in the
form of profit and loss statements and business bank statements.

Should I File Chapter 7 Bankruptcy if I Am a Sole Proprietor?

The answer depends on the amount of assets and debts the business has
and whether you intend to continue operating it. It may be a good idea
to file a Chapter 7 if you have a lot of business debt, no assets, and
you intend to shut down the business. On the other hand, if you have a
significant amount of assets and you intend to continue running the
business, it may be more advantageous to consider Chapter 13 bankruptcy.